A building's physical life is estimated at 90 years but its economic life at 55. Which figure drives depreciation analysis, and why?
Correct Answer
B) Economic life — value ends when contribution ends, not the structure
Why this is correct: The governing concept is that depreciation in appraisal is based on loss in value, not just physical wear. Economic life is the period over which an improvement contributes to property value. Value ends when the improvement's contribution ends, which may be long before the structure physically falls apart. Why the other choices are wrong: "The physical life, since the structure itself remains standing that long" is wrong; this confuses physical longevity with value contribution. "The average of the two estimates" is wrong; there is no standard method to average them. "Neither; only actual age matters" is wrong; effective age and economic life are used to estimate depreciation. Exam tip: For depreciation calculations, always use economic life, not physical life.
Why This Is the Correct Answer
Depreciation measures the loss in value already suffered, so the relevant span is the one over which the improvements add value, which is the fifty-five-year economic life. The ninety-year physical life describes how long the shell will stand, not how long the market will pay for it. Using economic life as the denominator produces a depreciation rate consistent with observed market behavior. The gap between the two figures is exactly the period during which the building would be standing but contributing nothing.
Why the Other Options Are Wrong
Option A: The physical life, since the structure itself remains standing that long
Using the ninety-year physical life stretches depreciation across a period well past the point where buyers stop paying for the improvements, so it understates the deduction. Standing and contributing are different things: a sound but obsolete structure can be worth less than nothing once demolition cost is considered. Engineering durability is not a valuation measure.
Option C: The average of the two estimates
Averaging the two spans has no theoretical basis and produces a life that describes neither physical durability nor market contribution. It looks like moderation, which is why it appears in the option list. Appraisal methodology asks which concept governs, not for a compromise between concepts.
Option D: Neither; only actual age matters
Actual age alone cannot produce a depreciation estimate because depreciation is a ratio and actual age supplies only a numerator, and the wrong one at that. Effective age measures condition and utility, and economic life supplies the denominator. Dismissing both concepts abandons the method entirely.
Standing Versus Paying
Physical life asks how long the building will stand. Economic life asks how long buyers will pay for it. Appraisers value payments, not persistence, so economic life wins every time.
How to use: Whenever a stem hands you two life spans, pick the shorter one labeled economic and use it as your denominator. If the question asks why, the answer is that value ends when contribution ends.
Exam Tip
Remember that economic life is normally shorter than physical life; an option using the longer figure is the trap.
Common Mistakes to Avoid
- -Using physical life as the denominator in the age-life ratio
- -Assuming a sound structure must still be contributing value
- -Averaging physical and economic life estimates
Concept Deep Dive
Analysis
Two life spans describe a building, and appraisers use only one of them. Physical life is how long the materials will hold together before the structure fails, a question of engineering. Economic life is the period during which the improvements continue to contribute to the value of the property as a whole, which is a question of markets. Because depreciation in appraisal means loss in value rather than physical wear, the denominator in every age-life calculation must be economic life. Buildings routinely reach the end of their economic life while structurally sound, at which point the site's value for redevelopment exceeds the value of the property as improved and demolition becomes the highest and best use.
Background Knowledge
You need the definitions of physical life, economic life and remaining economic life, and the principle that depreciation in appraisal is loss in value rather than physical wear. You also need to know that a structurally sound building can reach the end of its economic life when the site's redevelopment value exceeds its value as improved.
Real-World Application
In a redevelopment corridor an appraiser finds sound forty-year-old retail buildings selling essentially for land value less demolition cost, evidence that their economic life has ended even though their physical life has decades remaining.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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